In “Accounting for the Bond-Yield Conundrum,” senior economist Tao Wu uses a macro–finance model to examine the phenomenon of falling long-term interest rates during periods of tightening in monetary policy.

The fall in implied volatility of longer-term Treasuries is a major contributor to the bond-yield conundrum, according to Wu. Declines in the uncertainty of real GDP growth also may be a factor. Foreign official purchases of Treasury securities appear to play little or no role in the conundrum.

Much of the conundrum remains unexplained, Wu writes. Other factors not used in the model, such as pension fund reforms or changes in risk appetites, may play a role.